Chinese Millionaire Roils Brokers Over Shrinking Mansion

Hiroshi Horiike at his Malibu, California, mansion with his three dogs: Shogun (the gray Weimaraner); Samurai (white Akita); Jiji (black lab). Horiike is suing Coldwell Banker because its agent marketed the house as 15,000 square feet, but it's only 10,000. Photographer: John Gittelsohn/Bloomberg

Aug. 20 (Bloomberg) -- Millionaire Hiroshi Horiike spent
two years searching California for a dream home, one grander
than any he could find in his native China.

After visiting more than 80 properties in the Los Angeles
area with an agent from Coldwell Banker, Horiike paid $12.25
million in cash for a four-bedroom, six-bath Tuscan-style
mansion with a swimming pool, spa and guest house on 5.1 acres
(2.1 hectares) overlooking the Pacific Ocean.

There was just one catch. After settling in, Horiike found
the Malibu home had less living space than he’d been told -- a
third less. It had 9,434 square feet (876 square meters) instead
of the 15,000 square feet shown in marketing brochures from the
seller’s agent, who also worked with Coldwell Banker.

Horiike, who also goes by his native Chinese name Peng Hong
Ling after adopting a Japanese name as an adult, claimed he was
cheated and sued the agent and the brokerage. He won a state
appeals court ruling that sellers’ agents have a fiduciary duty
to protect buyers’ interests, not just those of their clients,
when there’s only one brokerage involved in a deal.

If left standing, the decision could compel disclosure of
confidential client information or force brokerages to drop out
of transactions where they represent both buyers and sellers,
threatening commissions on tens of thousands of deals.

‘Luxurious Problem’

“This luxurious problem of a mansion that wasn’t big
enough has become an industry’s potential nightmare,” said Dana
Tsubota, an attorney in Oakland, California, who represents real
estate developers and investors and isn’t involved in Horiike’s
case. “The decision takes a large step away from what is
current practice, and it would surprise me if brokers continue
to have ‘dual agency’ deals if the ruling isn’t struck down.”

The issue of dual agency arises when the agents for both a
home’s seller and its buyer work for the same brokerage.
Florida, Colorado, Kansas and Wyoming are the only states that
prohibit dual agency in real estate transactions, while most
states -- including California, home to more than 10 percent of
U.S. residential sales last year -- require disclosures by
agents, according to the National Association of Realtors.

California Governor Jerry Brown last week signed a bill
into law that extends dual agency disclosure requirements to
commercial real estate deals.

Increasingly Common

Dual-sided transactions are becoming increasingly common as
home brokerage companies such as Coldwell Banker’s parent,
Realogy Holdings Corp., and Warren Buffett’s Berkshire Hathaway
HomeServices take bigger shares of the market. The practice is
especially frequent among agents who deal in multimillion-dollar
properties.

Horiike sued Coldwell Banker and Chris Cortazzo, the Malibu
mansion’s selling agent, in state court in Los Angeles in 2010,
alleging false advertising, unfair business practices and breach
of fiduciary duty. He claimed he overpaid as much as $5 million
and demanded punitive compensation for misrepresentation of the
home’s size.

Horiike, 56, lost a jury trial in 2012. That verdict was
overturned in April by the appeals court, which ordered a
retrial, saying that the jury received incorrect instructions.
Coldwell Banker and Cortazzo then appealed to the California
Supreme Court. It agreed last month to hear the request to
reverse the appeals court’s decision.

New Disclosures

Coldwell Banker’s lawyers argue that agents will be forced
to disclose information that buyers and sellers typically keep
quiet, such as a homeowner needing a quick sale because of
financial problems.

“The buyer’s or seller’s only options are to 1) agree to
this nightmare; 2) forgo the sale or purchase they wanted to
consummate; or 3) fire their sales person,” Coldwell Banker’s
attorneys said in a court filing.

In California, licensed real estate agents must work for
brokers, who have more credentials and are responsible for the
agents’ actions. Coldwell Banker, the broker, and Cortazzo, its
No. 1 selling agent in Malibu, are scheduled to file their
opening arguments with the California Supreme Court by Sept. 15.
The court may rule on the matter next year.

“I want justice,” Horiike, said in an interview at the
Malibu mansion last month. “I don’t want anybody to be cheated
by a real estate agent.”

Cortazzo declined to comment and referred questions to his
attorney, Neil Gunny, who also declined to comment because the
case is still pending. Coldwell Banker Residential Brokerage
Co., the California affiliate named in the complaint, doesn’t
comment on pending litigation, said Holly Taylor, a spokeswoman
for the brokerage with Rogers & Cowan.

Billionaires’ Beach

Cortazzo said in court filings and testimony that a Malibu
ordinance allows for more of a property’s space to be counted in
its square footage, and that he explained to potential buyers,
including Horiike, why he used the larger size in his brochure.

Malibu is a Los Angeles getaway for Hollywood celebrities,
business barons and international investors. Pacific Coast
Highway slices between a string of waterfront enclaves with
names such as Paradise Cove and hills that are home to villas
with ocean vistas. Property owners on Malibu’s Carbon Beach,
nicknamed Billionaires’ Beach, include Oracle Corp. founder
Larry Ellison and entertainment mogul David Geffen.

Cortazzo, a native of Malibu and real estate agent since
1994, “has attracted some of the biggest names in entertainment
and business,” according to his website. He closed deals
totaling $325.5 million last year, the seventh-highest volume of
any U.S. agent, according to Real Trends Inc., a Castle Rock,
Colorado-based consulting service.

‘Have Integrity’

“The secret is to work hard and have integrity,” he said
on his website. “I am proof that you can reach the top without
sacrificing your values.”

When he was a boy, Horiike’s four-member family lived in a
200-square-foot attic in Shanghai, where his father worked as a
book editor and film critic. The family couldn’t afford an
electric fan to get through the summer heat, he said. After
earning a degree in Japanese at Shanghai University’s School of
Foreign Languages, he moved to Japan, where he married, changed
his name and became a Japanese passport holder.

He founded Large Horse International Group, a holding
company headquartered in Hong Kong with about 2,000 employees
that invests in energy deals and manufactures electric
appliances and parts sold to customers including Whirlpool Corp.
He retired in 2002, at age 44, with plans to buy a California
mansion larger than anything he could find in Asia.

“In Hong Kong or Japan, it’s impossible, because the land
is very small,” he said. “Only here in America, I can find my
dream house.”

Foreign Buyers

The case has implications for the growing number of cash-bearing foreigners, who may make quick deals dependent upon
agent advice. International buyers spent $92 billion on American
houses in the 12 months through March, led by a record $22
billion from Greater China, including Taiwan and Hong Kong,
where Horiike resides much of the year. About 60 percent of the
foreign buyers paid cash, according to a July report by the
National Association of Realtors.

“At the end of the day, I think they trust America more
than China,” Sam Van Horebeek, director of East-West Property
Advisors, a Hong Kong-based firm that advises Chinese investors
on U.S. real estate deals, said in a telephone interview.

Horiike started his Los Angeles search in 2005, guided by
Coldwell Banker agent Chizuko Namba, who spent more than two
years showing him dozens of homes in Beverly Hills and Bel Air,
communities Horiike said he liked for their luxurious
reputations. Nothing met his criteria.

Too Old

“Everything big was old,” Horiike said. “I wanted new,
because I didn’t want to spend time to remodel.”

In November 2007, Namba took Horiike to Malibu to see the
house shown by Cortazzo, who told Horiike it was built in 2002,
before Malibu imposed a size limit on new homes, according to
court filings.

“I said that this property cannot be duplicated,”
Cortazzo testified in September 2012, according to a trial
transcript.

“My heart was moved by his words,” Horiike said in last
month’s interview.

After viewing the house in the afternoon, Horiike returned
in the evening to see the property, which climbs a hill
overlooking Pacific Coast Highway and the ocean. He negotiated
the price after taking a flight to Hong Kong, according to a
court filing.

Cash Buyer

A full appraisal wasn’t necessary because Horiike was
paying with cash and didn’t need to qualify for a mortgage.
While the house was in escrow, Horiike ordered inspections of
the utilities and foundation. He didn’t ask to measure the
square footage or obtain a copy of the architect’s blueprints,
according to court filings. Los Angeles County property records
list the size of the living area as 9,434 square feet.

Horiike learned of the size discrepancy only in 2009, when
he sought a city permit to remodel a sun room. Cortazzo said
that the larger size he used is valid when the lower level,
garage and patio areas are included, according to court filings.
Cortazzo said county records of the house size didn’t reflect
Malibu’s “post-2005 formula for allowable square footage,”
which would add the basement and other spaces to the total area,
and that he relied on the home’s architect for the 15,000-square-foot figure.

Single Meeting

He also said that he was never asked nor agreed to
represent Horiike. The two met only the day Horiike visited the
Malibu house, and his limited English made it hard for them to
talk directly, Cortazzo said in court filings. A trial court
jury, acting on the judge’s instructions, found that Cortazzo as
the listing salesperson had no fiduciary duty to the buyer.

Namba, Horiike’s agent, declined to comment on the case.
She wasn’t named in the complaint because she didn’t
misrepresent the size of the house and “to sue Coldwell Banker
is to sue her,” Horiike said in an e-mail.

Horiike appealed and a state appeals court panel in Los
Angeles last year ordered a new trial. It cited closing
documents required under state law establishing that Coldwell
Banker, as broker for both the buyer’s and seller’s agents, had
“a fiduciary duty of utmost care, integrity, honesty and
loyalty” that extended to Cortazzo as well. Coldwell Banker
appealed that ruling before a second trial could be held.

The appeals court also said that Cortazzo told shoppers who
had looked at the home earlier that the architect put the living
space at 15,000 square feet and they should hire a specialist to
verify that. Cortazzo’s lawyers said in court filings that he
removed the square footage from the official listing and put it
at zero so he could personally explain to a potential buyer his
rationale for using 15,000 square feet in the sales brochure --
which he said he did with Horiike.

No Intent

A judge or jury “could conclude that Cortazzo was aware of
material information that he failed to provide Horiike, even
though he did not have a fraudulent intent,” the appeals court
said. No court has found Cortazzo or Coldwell Banker liable,
with the appeals court and California Supreme Court examining
only the law, not the actions of the agent or brokerage.

“If the appellate court decision is upheld, the fact that
there was no misrepresentation is still the same, but it would
change the landscape of consumers choosing their own
professional, as Mr. Horiike did, instead of having fiduciary
relationships foisted on parties with persons they have not
selected and may not ever even meet,” Lotus Lou, a California
Association of Realtors spokeswoman, said in an e-mail today.

Horiike, who’s divorced and wears his red-tinted hair down
to his collar, spends about 100 days a year at the Malibu home,
which he shares with three of his 10 dogs. He rejected offers to
resolve his complaint against Coldwell Banker and Cortazzo
through arbitration. He said he wants the outcome to be public.

“This case isn’t just for me,” Horiike said. “It’s about
justice for people.”